Netting Out Government COVID-19 Support as Part of the M&A Process in Canada

Canadian M&A deal levels remained comparatively steady throughout the COVID-19 pandemic, thanks in no small part to the support programmes offered by the Canadian government to businesses and individuals affected by the pandemic. In 2020, along with many other countries around the world, Canada enacted fiscal and monetary policies and programmes aimed at softening the economic and financial distress felt by businesses and individuals.

Although the programmes have varied somewhat from province to province, the following are among the key schemes offered nationally by the federal government:

These programmes provided a lifeboat to many people during some desperate times – in particular, the many businesses who were subject to lockdown mandates throughout the country. Even though the vast majority of these programmes have now either come to a close or been phased out, important consideration must be given to how the various forms of government support are factored into M&A deals and the assessment of a company’s worth.

In a business context, whatever form the support received by a company took (ie, whether it was a single, one-time sum or a series of payments), any such financial assistance should be classified as “non-ordinary course” or one-time revenues. Essentially, this refers to anything that is not considered “normal” for the purposes of reporting a business’ financials or structure.

From a due diligence standpoint, these non-ordinary payments or allowances can present a wide range of challenges and complexities. They can also dramatically alter a company’s financial reporting and thereby create potentially serious pitfalls for any prospective buyers.

As such, it is particularly important that appropriate attention is paid and emphasis given to understanding the effects they can have on a business. If the payments are not identified, then the profitability of the business will be overstated and may therefore result in an inaccurate value being attributed to profits that will not be sustainable.

Non-ordinary course payments in the form of government support can be a difficult thing to assess – both by external auditors and observers and by the companies themselves. Additionally, during a time in which survival was the primary objective of a huge proportion of businesses facing the pandemic, it is completely understandable that many companies were grateful to quickly take whatever support was offered – and only gave thought to how it might impact their organisation’s financials after the fact. Having the time, capacity and knowledge to keep accurate records of whatever support was received, for instance, was a luxury that many businesses could not afford.

However, as businesses and assets recover and change hands, these are gaps that must be filled with great care. As part of due diligence, purchasers should consider the following:

These are just a handful of the questions that need to be asked when assessing a company – and not all of them are easily answered.

The significance of these due diligence challenges is indicated by the recent increase in the amount of time and attention the Canadian government has devoted to retroactively auditing businesses that received support. In some cases, the government has clawed back funds where there may have been an overpayment simply due to minor errors in forms that the government rushed to get out the door.

Therefore, it is more important than ever to focus properly on understanding what government support was given, at what point in time, and how it has factored into a company’s financials and deal structure. As noted earlier, profitability may be overstated, and audit risks may make share purchase transactions untenable.

In summary, paying close attention to – and gaining a full understanding of – the effects of any support that was provided to a business by the Canadian government during the COVID-19 pandemic is not merely beneficial to the M&A process. It is crucial.